Ar the moment we seem to be in the midst of one of those twilight periods again when the economic outlook, data included, continues to darken, but stocks leap higher regardless.
Even as earnings show a clear weakening trend with fewer companies than usual out-performing expectations. Remember these published expectations are always on the low side to begin with.
Today in Australia, the Services sector went into contraction? While the Manufacturing sector continued to slow markedly. But wait, the Australian stock market jumped 2% in the morning session?
The services sector is Australia’s largest employer and driver of economic activity, and it is in contraction as of today, falling to a very unhealthy 49.0. At the same time, the Manufacturing sector continued to decline, down to 52.8 in October, and is probably headed toward contraction as well.
These are very disappointing numbers for the Governor of the RBA, who kept telling us the economy is strong and there is no problem in hiking interest rates as he chases the very inflation he said would never happen as well.
At least the new Federal government is more of a “look out the window” reality type. They are recognising the economic clouds already overhead, but a little oddly for the ALP, are focussing on the budget bottom line. Winding back some infrastructure spending. Combined with the ridiculous RBA performance in hiking rates a full year too late, the economy could be further squeezed by tighter fiscal policy too.
For some time now, I have been warning of a “Surprise Recession” in Australia. This is now very clearly on the horizon for all to see. Probably to occur in the first half of 2023. Not such a happy New Year for many Australians.
At least for the moment, stocks are having a good day.
This is driven by a Wall Street Journal article that the Fed, after this next 75 point rate hike, may slow the process. This would be good news, and certainly helps stocks from the point of view that things are only going to get modestly worse than they are, rather than extremely worse. I am not sure if the logic really follows that therefore stocks are miraculously, suddenly, a good investment again.
The reason rate hikes may slow to 50 points, even 25 points, is that it is fast becoming self-evident that the US economy is in serious trouble.
Not really a wonderful ‘all our troubles are over’ kind of situation. Perhaps, a generation of traders raised on computer gaming are only capable of binary decisions and analysis?
Hence the gross over-simplification belief that the stock market is only responding to interest rate expectations. Which, by the way, remain still headed much higher and without any chance at all of a pivot when inflation remains extreme.
Selling the current stock rally in the next few days would appear attractive.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
